A painful divorce

Writing on the wall ... AMP's shellshocked army of shareholders face another battering when trading resumes on Monday. Photo: Greg Wood

A slimmer, tarted-up AMP might be open to offers before long, writes Jennifer Hewett.

It was in mid-January that Andrew Mohl began to get that sick feeling in the pit of his stomach. AMP had to announce an unexpected profit downgrade out of the UK business on January 21.

Yet only six weeks earlier the new chief executive had assured the market things were now reasonably under control in the UK - after a detailed review, another write-down and the announcement of a new strategy to cut costs.

In the market, the news cut like a knife through his optimistic promises of a new, transparent culture in AMP. Back to the future. Yet Mohl understood more clearly than anyone that such a deterioration couldn't just develop without warning in such a short time. Problems in the UK were obviously still hidden but clearly far, far worse than he had ever appreciated.

The bigger problem then became extricating AMP from the mess.

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This week, the solution came down to a quickie divorce. No more for richer, for poorer, for sickness and in health ... the two new single parents won't even have to share custody of the kids.

The "new" AMP keeps the original offspring at home, where it can keep a close eye on them. The other AMP takes on the adopted problem ones, changes its family name and moves out completely - armed with a final cash payment to pay off debt, amid cries of good luck and goodbye.

All very neat and clever.

Except, that is, for the hapless small shareholders. They are still scratching their heads trying to figure out how this great deal means that shares, which closed at $8.73 on Wednesday - and which were more than double that a year ago - are now going to fall over the cliff come the start of trading on Monday. Quite possibly down past their previous all-time low of $5.90 last March.

It means that about 1 million Australians will be feeling extremely jaundiced about even that nice Mr Mohl's earnest assurances that this is (yet another) fresh start - "designed to take us forward with confidence and to put the experiences of the past few years behind us".

Will it finally work this time? Is what Mohl calls the short-term pain really worth the long-term gain? And can they trust a company which has managed to destroy so many billions of dollars of shareholder wealth in the few short years since demutualisation?

In fact, it seems the biggest chance of a sharp rebound in the shares will be the market analysis that all of this excision means the "new" AMP now becomes a much more likely takeover target - particularly given that the five-year restrictions on ownership post-demutualisation expire in June.

That's right. Thanks to the crash diet, a new slimmer and unattached AMP is just as likely not to exist in another year's time - or at least be on to a second marriage, this time with an Australian spouse.

Not that Mohl and Willcox expressed it like that when they explained their big new adventure to a startled market on Thursday.

"No matter what happens to the world and to other companies, AMP will be in a position to control our own destiny from this day forward," Mohl insisted.

Willcox talked solemnly about drawing a line in the sand once and for all.

"The purpose of the restructure we are announcing today is to draw that line," he said.

And a pretty straight line it is. Mohl described it as effectively bringing AMP back home. It basically means that all the Australasian financial services business - and the Australasian Henderson wealth management business - will become the "new" AMP by year end.

The rest of the business, including those awful life insurance businesses in the UK and Henderson's northern hemisphere operations, will be called Henderson and this will go its own way, with a separate board and management and a separate listing on the ASX.

AMP shareholders will eventually get pieces of paper in both - who knows at what price - and can decide what to do with them then.

Ironically, Henderson will actually be the bigger business. It will also be debt-free thanks to the latest $2.6 billion in write-offs and the $1.5 billion capital raising, which will be used to pay off loans made by AMP Life to various UK businesses including Henderson and Pearl.

The company insists that these are old loans and are just part of the demerger process rather than any new desperate need for cash to cover more unexpected financial sinkholes. There is a certain cynicism in the market at this explanation.

AMP was clearly so keen to do the deal quickly that it was happy to offer $1 billion worth of its shares to institutions at between $4.50 and $6.50. When the institutional offer closed yesterday, the price was set around $5.50. Existing retail shareholders will soon get a chance to buy up to $5000 worth at that level or at a 5 per cent discount to the average market price. The estimate is that about 10 per cent of them will take up the offer to raise another $500 million.

This turns out to be the biggest raising of capital by placement ever attempted in Australia. It seems such a waste that it's basically going to be used up as part of a divorce settlement.

But, hey, who wants to look back? "If we had the time again, if we had the knowledge we've got now, we'd do it differently," Mohl said. "But we are dealing with the reality of now - the fact that markets in the UK have halved, we have paid too much for acquisitions, we have put too much money into the UK. But we have to face that and move forward."

That seems about as much of an apology as shareholders are going to get - a point they may want to take up at the annual general meeting on May 15.

Willcox demurred from the suggestion that the old and new companies shouldn't more simply be called the good and the bad AMP. Mohl also explained how the UK life insurance companies would move out of volatile investment in equities and into fixed interest securities. It's all part of what is known in the company jargon as the "de-risking" strategy.

But it's still clear that the new Henderson is the far bigger risk and that any improvement in its fortunes is likely to be a long way off - even if the company did decide to leave the UK part of the old Henderson there so it didn't look like a total dog.

Answering the inevitable questions about guarantees the financial contagion was over, Willcox rather pointedly said he could not guarantee the sun would come up tomorrow. But he insisted that he didn't believe AMP would need any fresh capital injections after this.

The trouble is, of course, that shareholders have heard too many similar pledges before only to discover that reality turned out to be be rather different.

Go back a few years when a triumphant Paul Batchelor was explaining that the future for AMP lay in expansion overseas and how AMP's sophistication in dealing with the superannuation market in Australia would give it the edge when it came to dealing with a relatively inexperienced UK market.

Go back even to February when Mohl was announcing a $896 million net loss for 2002, but declaring there were no plans for equity capital raising or any need to invest additional capital in the UK.

At the time, the public focus was on AMP's use of derivatives to shelter it from the worst of the storm ripping through the UK market. It meant that AMP was effectively buying protection should the FTSE fall, but at a high cost, including severely limiting any benefits should the market rise.

"That strategy has worked," Mohl said this week. "It has brought us time ... it was not seen as a permanent solution."

By then the internal focus in AMP was finding just that permanent solution that a new board and chairman were demanding.

But, in the meantime, Mohl's refusal to give the type of predictions about the outlook and AMP's likely performance unsettled the market further. The share price headed further down in March to levels no one had ever imagined possible a few months earlier. The major reason was the black hole of the UK.

Mohl had sent his chief financial officer, Paul Leaming, and another AMP executive and actuary, Jonathan Moss, to the UK for a full appraisal of the situation. Grim and grimmer.

Yet none of the more obvious alternatives - like selling the UK business - were realistic. As Willcox remarked, the most likely buyers in the UK were in a similar position themselves, with similar financial pressures. Nor would the UK life insurance businesses themselves be alluring to anyone anyway, with their future prospects largely limited to a painful and lingering death.

Not only was this heavily weighing down the AMP share price, it also meant the market was valuing the whole UK business at worse than nothing, including the more successful Henderson wealth management operation.

The various permutations and possibilities were all examined at a lengthy board meeting in early April. It was the first meeting for the two new directors, including Pat Handley, who Willcox had chosen for his capital management skills and experience in helping rescue Westpac in the early 1990s from its own disastrous expansion.

Handley sat in the front row for the press conference and will now chair the new Henderson and try to repeat his turnaround success story there.

But the AMP saga in the UK already ranks up there as probably the worst example of the corporate fad for going global. This accelerated in the optimism of the 1990s and the smug vision of Australian companies and chief executives successfully taking on the world.

Mohl didn't want to draw any broader conclusions about international exposure for other Australian companies and there have been plenty of successes, small and large. Look at Westfield or News Corp.

But the list of big overseas disasters recently is also very noticeable. Consider NAB, BHP, Telstra. And now our back-at-home new AMP. AMP has made plenty of mistakes in its own market as well, of course. RIP GIO.

There are also some problems in its current Australian business reflected in the big fall in new business for Australian Financial Services for the first three months of this year.

It certainly didn't help that clearly so much of management time and attention have been consumed by trying to fix the mistakes of the past. Mohl is promising that a discreet team will work on the demerger to make sure the management is not distracted from its greater task of rebuilding the icon brand into the powerhouse it once was. If only to fatten it up for the coming market day ...

"I suspect many people will be surprised at the extent and speed of these changes," Willcox said. "However, the board and management team concluded that to do nothing and to hope that major recoveries in our markets would somehow provide a solution with us having to do anything was simply not an acceptable option."